Local hospitals try to reign in rate increases

While health care costs around the country are spiraling ever upward and have even been termed by some to a national crisis, several southeastern Wisconsin hospitals are reining in their rate increases.
According to the Wisconsin Hospital Association, the average rate increase statewide for 2004 is currently just under 7 percent. In the Milwaukee area, Froedtert Memorial Lutheran Hospital leads the field with just a 3 percent increase this year, while its smaller sister hospital, Community Memorial Hospital in Menomonee Falls, limited its increase to 4.75 percent. Children’s Hospital of Wisconsin (with facilities in Milwaukee and Kenosha) held the line with a 4 percent increase.
Rate increases for Aurora Health Care’s several area hospitals averaged just under 5 percent, and Kindred Hospital Milwaukee reported a five percent increase.
Columbia St. Mary’s in Milwaukee registered a 6.2 percent increase, and Columbia St. Mary’s Sacred Heart Rehabilitation Institute came in at just under 7 percent. Columbia St. Mary’s Columbia campus showed a 7 percent increase, as did Covenant Health Care’s various local hospitals.
Orthopaedic Hospital of Wisconsin in Glendale achieved an 8 percent increase, as did St. Nicholas Hospital in Sheboygan.
Trailing the pack were the Milwaukee County Mental Health Complex
(10 percent), St. Joseph’s Community Hospital in West Bend (10.6 percent) and United Hospital System’s Kenosha and St. Catherine’s campuses (16 percent).
The national average rate increase for urban hospitals this year is 6.3 percent, although and some eye-opening charges have been brought to light: a $5 aspirin pill, daily room charges of $5,000 at some New Jersey hospitals, and an $18,000 charge for an appendectomy in California, including a two-day stay in the hospital.
According to a study conducted by the University of Texas, the major culprit in the seemingly endless rise in health care costs is the distance between the patient and the financial and medical choices in the marketplace. Those choices currently are being made by others, such as HMOs, in the name of the patient.
Another cause cited in the report is the fear of medical malpractice suits. "Administering medically unnecessary tests and procedures helps to insulate doctors and hospitals from the potential wrath of patients or their families when inevitable accidents occur in medical treatment or when treatments just do not work," the study stated.
The study concluded that lowering "the currently large medical expenditures in the USA" could be accomplished by reining in the third-party payment system.
"Third-party payment mechanisms have raised the total consumption of medical resources to unprecedented levels," the study stated. "Putting the patient back in control of the medical purchasing system is the most effective way to control third-party mechanisms, while still providing a safety net for Americans."
The good news is Wisconsin hospitals are trying diligently to counter rising labor and equipment costs and improve efficiencies.
William Petasnick, president and chief executive officer of Froedtert and Community Health, says that his organization has successfully addressed the problem by "having a strong and deep commitment to good stewardship" and a continued focus on performance improvement, cost effectiveness and quality.
"Ten years ago, we established a culture of restraint that permeates our two hospitals and keeps us on track," Petasnick said.
At that time, Froedtert streamlined its management structure and increased the responsibility and accountability of its existing vice presidents.
Four years later, Froedtert introduced "upside down budgeting," a process that created the platform for most of the system’s other cost reduction tactics. The process forces every hospital department to manage expenses aggressively, Petasnick said. That budget process created a series of tactics that enabled Froedtert to limit rate increases:
* Workflow redesign efforts resulted in a savings of $10.7 million over the last five years.
* Contract renegotiations, supply standardization and other efforts led to a savings of $8 million since 2000 ($6 million in supplies and $2 million in pharmacy) and pharmacy cost avoidance of $1.5 million to $2.6 million annually from 2001-2003).
* Outsourcing business office and medical records has saved $1.75 million per year, and insourcing facilities management and therapy staffs has saved $2 million annually.
* Six Sigma, a measuring process that focuses on error and cost reduction, continues and saved about $600,000 last year.
Ed Howe, president of Aurora Health Care, the parent organization of six area hospitals, says his organization made a "conscious, strategic decision" about a year-and-a-half ago to guaranty price increases below the national benchmark for such increases for the next three years.
According to Howe, Aurora believes the most significant aspect of cost savings comes from preventive medicine.
"Price is not the biggest driver of health care costs. The biggest driver is illness. In Wisconsin, we have a large percentage of the population that is overweight. We have many people here who are couch potatoes. We have many people who are not adequately managing their cholesterol levels. We have diabetics who are not taking adequate care of themselves. Health education is key here, and we’re making a strong effort to get those messages across."
Aurora undertook a supply chain initiative and now utilizes bar coding to efficiently move medical supplies throughout its system, Howe said.
"We looked at employee pension costs and eliminated some early retirement incentives," Howe says. "We know we’ll have employee shortages in the future, and it doesn’t make sense to encourage early retirements.
At Children’s Hospital of Wisconsin in Milwaukee and Kenosha, keeping rate increases in the lowest quartile of the community has been a management goal for a long time, according to Tim Birkenstock, treasurer and chief financial officer.
"Because we have a public board of directors, we know how sensitive the community is to rising health costs. And because Children’s Hospital isn’t endowed with huge financial resources, we always play close attention to the importance of economic and efficient operation. Our management is finely tuned into this concept," Birkenstock said. "A lot of what we’ve accomplished has to do with growth. We’ve been in a growth mode for the last 15-20 years, and as you grow, you have to get more efficient and productive."
Birkenstock said Children’s Hospital management strives to reduce labor costs.
"We have programs in place that help us achieve recruitment and retention goals. Retaining good employees saves us money in terms of training and recruiting costs. We have a pay philosophy that says we’d rather pay employees well than pay recruitment bonuses. That’s been effective in keeping them here," he said.
Children’s Hospital also has been trying to aggressively manage supply costs, Birkenstock said.
"We belong to a buying group composed of children’s hospitals around the country. Buying as a group gains us discounts and better prices. And this past year, we did business with a different pharmaceutical company, which saved us a lot of money," he said.
Covenant Healthcare’s four hospitals in the community have many initiatives that are preventing costs from rising more quickly, according to Joy Tapper, executive vice president and chief administrative officer.
The organization’s board of directors and leadership has identified cost containment as a key to the Covenant system’s strategic plans, Tapper said.
"Operational efficiency is more important than ever to our 9,400 employees," she says. "We’re watching and managing expenses more closely. We’re into a continuous operational excellence initiative that ensures we are providing services cost effectively.
"We’re utilizing more efficient staff scheduling to decrease overtime and external agency usage. We’re improving efficiencies and resources in supply chain, materials distribution, and pharmacy. In our surgery processes, we’re optimizing patient scheduling and flow. And we’re improving the quality of care, and reducing patient length of stay," Tapper said.
Tapper says two of Covenant’s hospitals recently were approved to join a federally sponsored outpatient drug purchasing pool. Access to the program is available to hospitals that serve a disproportionate share of uninsured and underinsured patients.
"These hospitals can now purchase outpatient prescription drugs at a significantly reduced cost, allowing us to offset the losses that result from out treatment of the underserved," Tapper said. "We’ve also responded to new health plan designs that put more financial responsibility on the patient by becoming more efficient in the collection of co-pays and deductibles in all of our care settings, including hospital emergency departments. As one example, St. Francis Hospital has seen a 44 percent increase in collections in March, the policy’s second month."
Tapper discounted the thought that health care costs are going up dramatically because of construction projects undertaken by hospitals around the country.
"Capital costs for construction in health care are relatively small compared with the financial pressure put on the health care dollar by the workforce shortage, the rising cost of certain pharmaceuticals and government funding shortfalls for Medicare and Medicaid," Tapper said. "At Covenant, only 1.8 percent of our total expenses are for new construction and renovation of existing facilities. This is less than 1 percent of each dollar charged for patient care."
In West Bend, Synergy Health-St. Joseph’s Community Hospital’s Mike Malzewski, chief financial officer, says the system’s 10.6 percent rate increase was due to staffing shortages, inadequate reimbursements from Medicare and Medicaid, the costs of pharmaceuticals and the ramifications of malpractice insurance.
"The costs of new technology are also a factor for increased rates, but remember that the new technologies result in better care and longer lives for patients," Malzewski said. "Historically, however, our rates have been much lower than other hospitals."
According to Malzewski, his hospital is making diligent, concerted efforts to contain costs by improving staff productivity, controlling salaries and buying supplies at better prices through hospital buying groups.
"For the longer term, we’ll control costs by utilizing EPIC, an electronic medical records system that efficiently reduces paper work and the labor involved, and provides better patient care," Mazewski said.
August 6, 2004, Small Business Times, Milwaukee, WI

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Dr. Daniel A. Schroeder is President/CEO of Organization Development Consultants, Inc. (ODC). ODC serves regional and national clients from its offices in suburban Milwaukee. Additionally, he teaches in the Organizational Behavior and Leadership (bachelor’s) and Organization Development (master’s) programs at Edgewood College (Madison, WI), programs that he founded and for which he served as Program Director.

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